Why financial planning is flawed

By Dan McGrath

Jester Financial Technologies

Financial planning as defined by Investopedia is “A comprehensive evaluation of an investor's current and future financial state by
using currently known variables to predict future cash flows, asset values and withdrawal plans.”

There are firms dedicated to financial planning, designations designed solely to studying and implementing this method, and even an industry built on the very foundations of it. But if we look at some of the concrete truths that are a part of the very fabric of our life, it would appear that the methods being used today are not even in the same hemisphere of what will be required tomorrow.

The first truth is our demographics.

We know that today, the majority of our retirees are from what is commonly referred to as the “greatest generation” and they make up the roughly 38 million people currently in retirement who happen to be using the entitlements of both Medicare and Social Security.

What we also know today is that these 38 million retirees have started to deplete the resources of both Medicare and Social Security.

Social Security is reporting that the trust fund it maintains to pay out benefits will be exhausted by 2033, just four years after the
last baby boomer retires, while Medicare will reportedly be broke by 2026.

It should be noted that Congress, along with many past and current politicians, has also played a role in exhausting these programs by “borrowing” money from them over the years and never replacing it.

The reason why this becomes such a monumental issue is the fact that these two programs have been funded for the past 30 years by a group better known as the baby boomers, who happen to be close to double the size of the previous generation.

Today’s retirees have enjoyed having these so dearly needed entitlements funded by a workforce that is much larger than them. Unfortunately, the next in line won’t be so lucky.

Demographics again show us why financial planning is flawed. The generation that will replace the Boomers, Generation X, inherit the responsibility of funding these entitlements, which are close to insolvency now, but are nowhere near the same size.

The hard reality, according to the Bureau of Labor, is that Generation X is much smaller than the Boomers as a whole — only about 58 to 62 million in size.

The reality is there won’t be enough people generating the much need revenue through income taxes to even maintain the status quo.
How can today’s financial planning take the “known variables” of yesteryear and apply to them a plan that is expected to solve an issue retirees will face in the future, especially when the rules of retirement have changed, as well?

The other hard truth is the simple fact that over the course of two decades, the federal government has made not so discreet changes to the retirement process. Survey after survey concludes that one of the biggest concerns baby boomers have is the ability to be able to fund their health costs in retirement. Looking at the numbers, there's good reason for their concern.

But again, it becomes clear that the financial planning process may have a flaw in it as the this expense has yet to be addressed properly, if at all. In fact, Sun Life Financial reported in its "Flying Blind" survey that over 92 percent of those polled had never planned for any health costs in any financial plan.

This becomes a bigger problem considering the very changes that have been made by the federal government affect this very topic.

Since 1993, due to a change in the Program Operations Manual System of Social Security, in order to collect any Social Security benefits, a person must also accept Medicare when eligible.

This means every single person who wants to collect their Social Security must also have health costs or they will forfeit all current, future and even past benefits.

The question that arises is: If the government doesn't mandate that they have to have a mortgage, or a car payment or that that they have to take a vacation, but it does state that they will be penalized if they don't have health costs, then why is this expense not addressed in most financial plans? Why is not standardized in every plan?

This becomes an even larger issue due to a 2003 ruling by Congress, the Medicare Modernization Act, which created a rule where Medicare is also means testedl. In other words, the government is going to look at how much retirees are earning and if it’s too much, then the cost of their health care premiums will increase.

The problem is even further compounded thanks to a 2007 change in the definition of income. According to Social Security, income is defined as the “adjusted gross income PLUS any tax exempt income or everything on lines 37 and 8b or the IRS form 1040”.

This definition practically includes everything that the boomers have saved in their financial plan, with the exceptions of just a few items like Roth accounts, specific annuities and life insurance. And how many people are incorporating these items?

According to a recent Wall Street Journal article, only about 46 percent of all employer sponsored retirement plans contain a Roth provision, while according to Fidelity, just 6 percent of all participants are utilizing them.

As for life insurance and those specific annuities, there are financial entertainers who promote eschewing them on a daily basis in favor of the very same investments that will strip retirees of their income while increasing their health costs.

What comes next is anyone's guess, but looking at history to predict the future is definitely is likely not an effective strategy in this case, especially with the two concrete truths of demographics and government regulations changing the game.